April 21, 2021

Health Industry Consolidation in California: What’s Left to Settle?

California’s Sutter Health system has become a flashpoint in the national debate over the negative...

California’s Sutter Health system has become a flashpoint in the national debate over the negative impact of health industry consolidation. Shown here, one of the organization’s 24 hospitals, Sutter Medical Center in Sacramento, is licensed to operate 523 beds. Photo: Andrew Seng / Sacramento Bee / ZUMA Wire

Last Sunday night, the CBS television news magazine 60 Minutes focused its powerful lens on California’s antitrust lawsuit against Sacramento-based Sutter Health. As correspondent Leslie Stahl told the national audience, market consolidation and the potential for anticompetitive behavior is “one of the main reasons . . . that health care costs in this country are going through the roof.”

The parties reached a landmark settlement this year, but it is still months away from being approved by the court. Whenever the court case concludes, the work of promoting competition in California’s health care marketplace won’t be finished. While antitrust complaints remain important tools for ensuring large systems don’t abuse their market power, it is clear that additional public policy interventions are urgently needed in California’s heavily consolidated hospital, physician group, and insurance markets.

Under the preliminary settlement, Sutter Health must limit its charges for out-of-network emergency services, allow insurers and employers to disclose pricing information to patients, and change the way it negotiates prices with insurance companies. Without admitting wrongdoing, the system agreed to pay $575 million in damages to California’s self-insured employers and unions as compensation for inflating prices of health care services for the workers and families they cover.

What We Know About Market Consolidation in Health Care

This tentative agreement follows years of state litigation informed by extensive academic research and federal case law that conclusively established these key points:

  • Market consolidation among and between health systems, hospitals, medical groups, and health insurers is increasing, both nationally and within California. Many hospital, physician, and insurer markets in the state are dominated by a small number of firms (oligopoly) or by one firm (monopoly). While some regions are more consolidated than others, all of California is affected.
  • Industry consolidation harms consumers through higher health insurance premiums and out-of-pocket costs. This is true both within California and nationwide.
  • Market consolidation does not result in more efficient health care, and it should not be confused with the benefits of clinical integration and coordination of care. While higher levels of clinical integration may enable increased use of evidence-based care and greater adoption of health information technology, consolidation does not improve quality (PDF). Federal courts have ruled (PDF) that clinical integration is distinct from — and may be achieved without — market consolidation.
  • When rural hospitals are absorbed by large health systems, neither their financial stability nor performance are improved, and clinical integration is not promoted.

Given the clear financial harm to patients, policymakers nationwide have long wrestled with various approaches to health care consolidation. Unfortunately, there isn’t one clear solution. Relying exclusively on existing antitrust law and the court system has drawbacks. As we’ve seen with the Sutter case, private and public antitrust complaints take years to resolve and may not set legal precedents that alter behavior across the rest of the market. Similarly, legislative and regulatory approaches may not keep up with industry practices.

While the Sutter settlement provides some injunctive relief to the people of California, policymakers must recognize that it doesn’t resolve the broader problem. Even without flagrantly monopolistic behavior, consolidation is harmful — and not limited to Sutter, to one part of the state, or to one part of the industry. As CHCF’s new regional market reports show, areas that have historically had independent hospitals and physicians, like the rural north and the exurban south, now face the same consolidation trends and threats as the rest of the state.

How Can California Build on the Sutter Settlement?

Fortunately, we have some leads to follow in thinking about next steps. Policymakers in California and in other states have been exploring competition policy for years. The California attorney general already has authority to review mergers and acquisitions among nonprofit hospitals, but that does not extend to for-profit entities. In addition, premerger notice and approval is not required for most medical groups in the state. In contrast, Connecticut and Massachusetts give regulators authority to set conditions for approval in advance.

Other states have moved to restrict the anticompetitive contracting practices (PDF) at the heart of California’s complaint against Sutter. Michigan and North Carolina ban specific anticompetitive practices, while Massachusetts has empowered an agency to publicly review contracts for monopolistic terms on an ongoing basis. Rhode Island and Colorado have capped rate increases exceeding specified growth targets to impede unequal bargaining power that can lead to market failures.

When the antitrust case against Sutter finally comes to a close, policymakers in California must ensure that all of the large health systems, medical groups, and health insurers compete on a level playing field. Only then — long after the ink dries on any one legal settlement — will we have a market working in the best interests of all Californians.

The post Health Industry Consolidation in California: What’s Left to Settle? appeared first on California Health Care Foundation.